NEW YORK (Reuters) – A mad week in Treasuries has prompted investors to analyze the cross currents that could influence the prices of U.S. government bonds in the coming weeks, including the Federal Reserve, economic data and the investor positioning.
The yield on the benchmark 10-year US Treasury index, which moves inversely to bond prices, recently stood at 1.28% on Friday, after falling to 1.128% earlier in the week, nearly 65 basis points below its 2021 high amid concerns about a slowdown. growth and spread of COVID-19 infections.
Flows to the iShares 7-10-year Treasury Bond ETF reached around $ 1.2 billion in the week ending July 21, their highest in a year according to Lipper, illustrating demand of US government bonds.
One of the key questions now hanging over the markets is whether Treasury yields will continue to move towards 1% – revisiting the levels they hit during the pandemic – or rebound towards 2%, a level that many attendees expected to see by the end of the year.
Here are some indicators that investors watch to determine the market price of the Treasury.
GRAPHIC: An earlier rate hike –
The Federal Reserve surprised many market participants with a hawkish turn at its June policy meeting, with its so-called dot chart showing some officials raising expectations for their first rate hikes until 2023.
As the Fed’s policy meeting ends on July 28 and the central bank’s annual symposium in Jackson Hole is slated for late August, investors will be watching for signs that officials are backing down on assurances that the current inflation is transitory, a message that could shake the markets. .
Investors will also be looking for signals of whether officials believe the Delta variant of COVID-19 may put pressure on growth, potentially delaying the unwinding of the Fed’s easy money policies and depressing returns.
CHART: Yields on Treasury bills and high yield spreads –
While Treasury yields have fallen, the spread between Treasuries and high yield bonds has remained stable. This suggests that some investors remain bullish on the economy as a whole, as short-term factors such as positioning and supply are boosting the recovery in Treasuries, said Jonathan Golub, chief US equities strategist at the United States. Credit Suisse, in a report.
GRAPHIC: Speculative positioning –
Leverage funds – including hedge funds – have crammed into bearish bets on U.S. Treasuries under what’s known as reflation trading, which has seen investors position themselves for lower yields and buy stocks of companies that could benefit from a strong rebound in growth. [L1N2OX2MM]
While speculative net bets on 10-year Treasury futures moved into bullish territory for the week ending July 13, those on other maturities, including 30 years, remained bearish, according to data from the Commodity Futures Trading Commission.
A reversal of this positioning could fuel Treasury gains and lower yields.
GRAPH: Citi Economic Surprise Index –
As the economy continues to rebound from last year’s collapse, fears of a slowdown in the pace of growth contributed to the rally in Treasuries earlier this week.
Citigroup’s U.S. Economic Surprise Index, which measures how much data exceeds or misses economists’ forecasts, stands at 11.6, from its high of 270.8 reached in 2020.
Praveen Koropaty, US interest rate strategist at Goldman Sachs, believes the Fed will want to see the July, August and September employment reports before committing to unwinding its easy money policies.
At some point in November or December, “the Fed will announce a cut and I don’t think the market will panic because it will be well telegraphed,” he said.
GRAPHIC: Inflation break-even points –
DEATH POINT INFLATION RATE
Breakeven points – the yield spread between a Treasury note and an inflation-protected Treasury security of the same duration – are narrowing, a sign that investors are more confident in the Federal Reserve’s estimate that inflation high will be transient, wrote Craig Johnson, chief market technician at Piper Sandler.
“The rout in commodity markets and the decline in the momentum of reflation gives the Fed’s forecast additional credibility,” he said.
Reporting by David Randall and Saqib Iqbal Ahmed Additional reporting by Lewis Krauskopf and Sujata Rao; Editing by Mark Potter